Question Aysha Finance & Economics

What is the contribution of microfinance institutions on the growth of small and medium enterprises (SMEs)?

What is the contribution of microfinance institutions on the growth of small and medium enterprises (SMEs)?

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Answer Expert #27044

The lack of sufficient funds to set up and maintain small businesses has been identified as a significant problem in the global business field. It has been illustrated that the concept of microfinance can be adequately incorporated into SMEs in order to boost their financial performance (Wijesiri, 2016). Yet, it is important to specify that microfinance is not solely related to providing loans to individuals. It has been considered from a more holistic perspective in the sense that it is interrelated to sustainability in improving the performance and economic outlook of SMEs. Microfinance can play an important role in prompting relevant financial reforms in developing countries such as India and China (Rahman et al., 2015). At the same time, the specific structure of microfinance provides substantial opportunities to SMEs to grow and prosper in the future. However, research on the relationship between microfinance and the profitability of SMEs is inadequate. It has been argued that the active participation of SMEs in various microfinance schemes can enable them with a relevant opportunity to increase their revenues and net profits in the long term. In assessing the financial conditions in SMEs, it appears that personal funds and retained earnings have been identified as quite important indicators of the demand for microfinancing (Wijesiri, 2016). Those SMEs with lower productivity and insignificant retained earnings can encounter persistent problems, thereby their demand for microfinance options can substantially increase. At the same time, it can be predicted that microfinance can play an essential role for those SMEs that have considered the option of borrowing under unhealthy economic conditions. Certain firm characteristics should be determined in assessing the likelihood for SMEs to receive microfinancing funds (Rahman et al., 2015). Therefore, microfinance institutions can help SMEs facilitate their growth in terms of improved performance and profitability in the future.

References

Rahman, N. A. Hassan, S. Said, J. (2015). Promoting sustainability of microfinance via innovation risks, best practices and management accounting practices. Procedia Economics and Finance. 31(1) 470-484.

Wijesiri, M. (2016). Weathering the storm: Ownership structure and performance of microfinance institutions in the wake of the global financial crisis. Economic Modelling. 57(1) 238-247.